TUC calls for ban on umbrella companies

The TUC has called for umbrella companies to be banned, saying they create multiple issues which make it difficult for workers to exercise their basic rights, but critics say a ban is too extreme and want better enforcement.

Umbrella companies are used by recruitment agencies and operate a PAYE (pay-as-you-earn) payroll system for the agency workers that they find work for. In many cases, the umbrella company employ the agency worker, with the agency workers becoming “employees” of the umbrella company.

The TUC says workers often face misleading and unfair deductions from pay and that breaches of holiday leave and pay entitlement are widespread – with umbrella companies preventing workers from taking their holiday entitlements. It states that poor regulation and enforcement exacerbates this.

It adds that “the use of umbrella companies fragments the employment relationship”, leaving workers unsure of who to speak to to resolve problems and often “passed from pillar to post” when trying to sort out their issues.

There have been concerns about some umbrella companies which encourage their employees to use tax evasion schemes, leaving them potentially facing huge future tax bills.

The TUC is worried that use of umbrella companies will increase as a result of post-Covid staff shortages and changes to tax rules due to IR35 legislation being applied to the private sector. Government guidance states that IR35 rules, which are creating a lot of confusion about employment status, are unlikely to apply to those employed by an umbrella company.

The TUC estimates that half of agency workers now work for umbrella companies in part due to the need during the pandemic to rapidly hire health and other key worker staff.

It wants to see recruitment agencies paying and employing the staff they place with clients as well as joint liability laws in supply chains that make the end client and any contractor in the supply chain responsible for upholding the legal rights of those working in the supply chain.

TUC General Secretary Frances O’Grady said: “Everyone deserves decent work. But too many low-paid workers are denied the wages they were promised and basic legal rights like holiday pay because they work for umbrella companies.

“Lots of them are the key workers we all applauded – like social care workers, teachers and coronavirus testing staff.

“These scandalous workplace practices have no place in modern Britain. But our inadequate regulations let dodgy umbrella companies off the hook – allowing them to act with impunity.

“Employers shouldn’t be able to wash their hands of any responsibility by farming out their duties to a long line of intermediaries.

“Enough is enough. It’s time for ministers to ban umbrella companies, without delay.”

However, Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance, says the call for a ban is surprising, given a recent report commissioned by the TUC did not ask for a ban. He said: “Whilst there is a lot of regulation already in place to address malpractice in the industry, a blanket ban is not the way forward and the call by the TUC serves to demonstrates a lack of understanding on how compliant umbrellas work to support workers.  There are many schemes in the marketplace purporting to be umbrellas that are giving the whole sector a bad name and it is important to understand and recognise what is not an umbrella company – schemes that fall into the ‘have I got a good idea for you’ category and hold varying degrees of risk to workers and the whole supply chain.”

He called on the Government to urgently address transparency, enforcement and non-compliance due to the complexity of current legislation. He said: “HMRC holds all the data it needs to stamp out bad practice and it is simply not taking the proactive approach.  This is where the real problem lies.”

His call for more visible enforcement was echoed by Dave Chaplin, CEO of contracting authority ContractorCalculator, who said: “Whilst there have been calls for more regulation, experience indicates that rule books, whether statutory or self-made, are rather meaningless unless there is actual enforcement…Payroll transparency and monthly independent party auditing is where the market needs to head, and some are already leading the way on that.”

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